- The MXN has recently neared 16.60, maintaining its positive momentum. The appreciation has been in line with our expectations, given our positive view on the MXN in recent years. We have mentioned in previous reports that constructive fundamentals, valuation and an appealing carry have aligned to prompt this outperformance, and overall we think that the MXN has scope to maintain this positive differentiation in the near term. However, with the recent movement, the scope for firming more seems tighter, in our view, and we thus expect the currency to reach levels of c18.0 by the end of the year and to move towards 19.0 around the time of the general election (2 June 2024).
- From a fundamental perspective, and as a result of the recent appreciation, the MXN has moved closer to our fair value estimation. Once at fair value levels, further MXN gains would only be explained by risk appetite and carry. As Banxico will most likely maintain its monetary policy rate in the near term, we expect the MXN to remain relatively anchored in 3Q23.
- Nonetheless, we stand pat on our view that the currency will depreciate towards the end of the year and particularly in 2024. Our main concern is related to Mexico’s fiscal accounts and Pemex. As we have mentioned recently, the probability that Mexican sovereign debt is downgraded in 2024 cannot be ignored. In addition, a slowdown in the Mexican economy, a lower carry and the general election in Mexico and the US in 2024 may well weigh negatively on the MXN, particularly given that no volatility has been priced in around these dates.
- Given this, hedging MXN positions for 2024 already makes sense to us, considering the recent appreciation and current forward levels. Overall, the potential risks are rising and the USDMXN has already recovered all the ground lost in 2016 as a result of the USMCA negotiations.